All awaiting Fed move

by **Cals** Tue 17 Sep 2013, 03:17

Published: Monday September 16, 2013 MYT 12:00:00 AM
Updated: Monday September 16, 2013 MYT 6:26:49 AM
All awaiting Fed move

NEW YORK: Months of anticipation will come to an end this week when the Federal Reserve finally says whether it will start to rein in its massive stimulus of the economy, which has flooded financial markets with some US$2.75 trillion over the past five years, supercharging returns on everything from stocks to junk bonds.
But for all the concerns that the reduced presence of such a giant asset buyer would be calamitous for investors, it appears equity and bond markets are poised to take this week’s Fed decision largely in stride provided the central bank doesn’t surprise with the size of its move or shock in some other way.
The Fed has telegraphed its intentions to pare back its monthly purchases of US$85bil in bonds at its two-day meeting that ends on Wednesday. The scale of the tapering and what Fed chairman Ben Bernanke might say at his press conference are key here, but the steady messaging in the last few months means this week probably won’t see carnage in the markets.
Investors have already done a lot of work in absorbing the Fed’s message. Benchmark bond yields are now hovering near two-year highs, while stocks have edged off highs reached in early August, removing some of the froth that had started to concern some investment strategists.
“The Fed already got tapering without actually tapering,” said Daniel Heckman, senior fixed income strategist at US Bank Wealth Management in Kansas City, Missouri. Key measures of volatility and futures positioning show there is not much fear.
The CBOE Volatility Index, the market’s favoured gauge of Wall Street’s anxiety, hovered around 14 on Friday, a level associated with calm markets.
The Fed has said it would wind down its programme if it is confident that the economy is improving, particularly that the jobless rate is heading lower. If it delays any action, it could raise concerns that it fears economic growth is going to be too anemic without the Fed’s help.
Recent data has been mixed, with August jobs and retail sales data falling short of expectations.
Consumer sentiment has fallen in part due to rising interest rates. That’s prompted analysts to issue only modest forecasts for the reduced buying.
A Reuters poll showed a consensus for the programme’s US$85bil monthly pace to be cut by US$10bil, less than earlier estimates. However, the current low volatility means the Fed runs the risk of spooking markets if it moves too quickly or surprises with its intentions.
“The Fed needs to move from being aggressively stimulative to merely very stimulative,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management in New York. “Markets are less prepared for it to do more, and if it does you might see a return to defensive areas.”
In May, after Bernanke spoke about potentially slowing stimulus this year, the S&P 500 fell 7.5%. The index is unlikely to see a similar decline on any surprise this week, with many analysts citing its 50-day moving average as support.
Currently, the index is 0.7% above that level.
While the Fed will be the primary market driver this week, investors will also look to quarterly results from FedEx Corp, viewed as a proxy for economic activity, and software giant Oracle Corp.
The market will also see data on August housing starts and existing home sales, and the monthly Philadelphia Fed business index. – Reuters